The Federal Reserve Board announced a temporary change to its supplementary leverage ratio rule to ease strains in the Treasury market resulting from the coronavirus and increase the ability of banking organisations to provide credit to households and businesses.
The change would exclude US Treasury securities and deposits at Federal Reserve Banks from the calculation of the rule for holding companies, and will be in effect until 31 March 2021.
Liquidity conditions in Treasury markets have deteriorated rapidly and financial institutions are receiving significant inflows of customer deposits along with increased reserve levels. The regulatory restrictions that accompany this balance sheet growth may constrain the firms' ability to continue to serve as financial intermediaries and provide credit to households and businesses.
The change to the supplementary leverage ratio will mitigate the effects of those restrictions and better enable firms to support the economy.
As the board previously stated, financial institutions have more than doubled their capital and liquidity levels over the past decade and are encouraged to use that strength to support households and businesses.
The board is providing the temporary exclusion in the interim final rule to allow banking organisations to expand their balance sheets as appropriate to continue to serve as financial intermediaries, rather than to allow banking organisations to increase capital distributions, and will administer the interim final rule accordingly.
The supplementary leverage ratio generally applies to financial institutions with more than $250 billion in total consolidated assets. It requires them to hold a minimum ratio of 3%, measured against their total leverage exposure, with more stringent requirements for the largest and most systemic financial institutions.
The change would temporarily decrease tier 1 capital requirements of holding companies by approximately 2% in aggregate, and will be effective immediately. The public comment period will be 45 days.
Re-disseminated by The Asian Banker